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Newsletter: Production cuts on the Norwegian Continental Shelf

Today the Norwegian Government decided to slash oil production to counter the effects of plummeting oil prices worldwide.

The Government announced today that oil production on the Norwegian continental shelf will be reduced by 250 000 barrels per day in June, and 134 000 barrels per day for the second half of 2020. Norwegian oil production will also be reduced, as oil fields that were bound to begin production in 2020, will be delayed until 2021.  

The measure will be in force throughout 2020 and does not include gas and condensate field, fields straddling Norway's international border, as well as particular fields where such regulation may impair resource management, examples of which are fields in their final stages of production.

Pursuant to section 4-4, subsection 3, of the Norwegian Act relating to petroleum activities ("the Act"), the Ministry of Petroleum and Energy annually issues production licenses for each oil field, detailing permitted production quantities. Section 4-4, subsection 4, however, permits deviation from these set limits, given that certain conditions are met. 

The fundamental condition that must be fulfilled in order to reduce production pursuant to subsection 4, is the requirement that "interests important to society" ("vektige samfunnshensyn") make the regulation "necessary." Pursuant to the preparatory works to the Act, this condition should interpreted strictly, establishing a high threshold to its invocation. Production regulation is meant to be employed as a measure of last resort. However, the law cannot be interpreted as to require that national authorities be under duress. At the same time, it is not sufficient to establish that essential interests are at stake.

The question as to whether the required interests make production cuts "necessary," relies on the balancing of relevant interests. Both pros and cons related to production cuts must be taken into consideration.

Moreover, it is assumed that significant economic downturns, as well as interests related to currency and credit policies, may constitute basis to invoke subsection 4. Under the previous petroleum act, a similar section was invoked to reduce production in 1986 and again in 1998 in order to alleviate a global overproduction (glut) in the oil market.

Consequently, there appears to be firm legal ground on which to argue that the interests at stake make production cuts necessary.

In today's announcement, the government also stressed that the cut will be evenly distributed among the oil fields, and that the regulation will be executed through the revision of production licenses, but only after consulting with the oil companies. 

Section 4-4, subsection 4 of the Act, postulates that the production cut is evenly distributed, in order to avoid unfair consequences. At the same time, the subsection makes clear that existing agreements and delivery obligations must be taken into consideration. 

The government's decision is possibly also relevant in relation to competition regulations. These regulations will normally deny enterprises signaling or agreeing on production limits, unless there are objective reasons that may outweigh the damage caused.  The question as to whether competition regulations apply to states, OPEC, as well as similar players, is contingent on whether these entities may be considered "undertakings", i.e. that they are running economic activities. We are not aware as to how the government has assessed this particular question in this case.

Following a formal decision by Cabinet, the production cuts will be made through the issuing of revised production licenses by the Ministry of Petroleum and Energy, the new limits of which will remain valid throughout 2020.